Guest Post: Congressional Research Service Confirms Big Banks Borrowed Cash For Next To Nothing, Then Lent It Back to the Federal Government at Much Higher Rates

Washington’s Blog

As I’ve noted for years, the government has been guaranteeing that the big banks make money at taxpayer expense by loaning money at very low interest rates, and then letting the banks loan the money back to the government at much higher interest rates.

For example, as I pointed out in January:

Bloomberg notes:

The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks, said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics. “It’s a transfer from savers to banks.”

The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.

The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18.

Harry Blodget explains:

The latest quarterly reports from the big Wall Street banks revealed a startling fact: None of the big four banks had a single day in the quarter in which they lost money trading.

For the 63 straight trading days in Q1, in other words, Goldman Sachs (GS), JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) made money trading for their own accounts.

Trading, of course, is supposed to be a risky business: You win some, you lose some. That’s how traders justify their gargantuan bonuses–their jobs are so risky that they deserve to be paid millions for protecting their firms’ precious capital. (Of course, the only thing that happens if traders fail to protect that capital is that taxpayers bail out the bank and the traders are paid huge “retention” bonuses to prevent them from leaving to trade somewhere else, but that’s a different story).

But these days, trading isn’t risky at all. In fact, it’s safer than walking down the street.


Because the US government is lending money to the big banks at near-zero interest rates. And the banks are then turning around and lending that money back to the US government at 3%-4% interest rates, making 3%+ on the spread. What’s more, the banks are leveraging this trade, borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets. Which means the banks can turn relatively small amounts of equity into huge profits–by borrowing from the taxpayer and then lending back to the taxpayer.


The government’s zero-interest-rate policy, in other words, is the biggest Wall Street subsidy yet. So far, it has done little to increase the supply of credit in the real economy. But it has hosed responsible people who lived within their means and are now earning next-to-nothing on their savings. It has also allowed the big Wall Street banks to print money to offset all the dumb bets that brought the financial system to the brink of collapse two years ago. And it has fattened Wall Street bonus pools to record levels again.

Paul Abrams chimes in:

To get a clear picture of what is going on here, ignore the intermediate steps (borrowing money from the fed, investing in Treasuries), as they are riskless, and it immediately becomes clear that this is merely a direct payment from the Fed to the banking executives…for nothing. No nifty new tech product has been created. No illness has been treated. No teacher has figured out how to get a third-grader to understand fractions. No singer’s voice has entertained a packed stadium. No batter has hit a walk-off double. No “risk”has even been “managed”, the current mantra for what big banks do that is so goddamned important that it is doing “god’s work”.

Nor has any credit been extended to allow the real value-producers to meet payroll, to reserve a stadium, to purchase capital equipment, to hire employees. Nothing.

Congress should put an immediate halt to this practice. Banks should have to show that the money they are borrowing from the Fed is to provide credit to businesses, or consumers, or homeowners. Not a penny should be allowed to be used to purchase Treasuries. Otherwise, the Fed window should be slammed shut on their manicured fingers.

And, stiff criminal penalties should be enacted for those banks that mislead the Fed about the destination of the money they are borrowing. Bernie Madoff needs company.

As Shahien Nasiripour reports, the Congressional Research Service has just confirmed what we’ve been saying:

A newly-released study from the Congressional Research Service bolsters claims that the nation’s largest banks profited off the Federal Reserve’s financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.

The report reinforces long-held beliefs that the banking system in essence engaged in taxpayer-financed arbitrage: They got money for free, then lent it back to Uncle Sam while collecting juicy returns. Left out of the equation are the millions of everyday borrowers, like households and small businesses, who were unable to secure loans needed to tide them over until the crisis ended.

The Fed released records under pressure in December and March that showed the extent of its largesse. The CRS study shows for the first time how some of the most sophisticated financial firms could have taken the Fed’s money and flipped easy profits simply by lending it back to another arm of the government.


In all, more than $3 trillion was lent to financial institutions from the Fed, and terms were generous. Junk-rated securities were pledged as collateral for taxpayer-backed loans. The Fed did not provide conditions for how the money was to be used.


“Why wasn’t the Fed providing these same sweetheart deals to the American people?” asked Warren Gunnels, senior policy adviser to [Senator] Sanders. “The Fed was practicing socialism for the rich, powerful and the connected, while the federal government was promoting rugged individualism to everyone else.”

At the time, Fed officials said its bailout programs were necessary to restart the flow of credit. If money couldn’t flow to lenders, households and businesses would be next. Even more layoffs and foreclosures could have ensued, officials argued.

Lending, however, decreased, according to Fed and Federal Deposit Insurance Corporation data.


Sanders said the spread between firms’ borrowing rates and their lending rates to Uncle Sam amounted to “free money.” For Bank of America during the third quarter of 2009, the spread was nearly 3 percent.

No wonder Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky, the Wall Street Journal and Bernie Madoff all say that the U.S. economy is a giant Ponzi scheme.

As I noted last year:

The governments of the world have spent trillions trying to paper over the fraud and prop up the big, insolvent banks, instead of forcing them to restructure and forcing bondholders and shareholders to take a haircut.

A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent drives up the costs to the country:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.


All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

The American banks and government have certainly pretended that all of the big banks are solvent. As ABC wrote in October 2009:

The Treasury Department and the Federal Reserve lied to the American public last fall when they said that the first nine banks to receive government bailout funds were healthy, [the special inspector general for the Troubled Asset Relief Program] states in a new report released today.

Similarly, the stress tests were a complete and utter sham.

The government has given the giant banks huge amounts in loans and guarantees based upon their false representations about their financial health. The Fed has larded up its balance sheet with toxic assets from the banks.


Throwing trillions at the giant banks – who are mainly using the money to gamble – is not stimulus. It helps the executives of the big banks and their shareholders and bondholders, but not the broader economy.

Indeed, attempting to prop up big, insolvent banks is preventing stimulus from getting out into the economy.

Indeed, the big banks are still insolvent. Moody’s – a mere 3 years too late – just put Bank of America, Citi and Wells Fargo on a downgrade watch. And see this.

The country has been plundered to throw money at the big banks to allow their CEOs to rake in bonuses by playing an extend-and-pretend game (pretending they are solvent). This has driven us from the “wealth of nations” to the “debt of nations”.

As I wrote in 2009:

If the power to create credit were taken away from the Federal Reserve system and its private banks and given back to the [people] (as the Constitution envisioned), then American taxpayers would save hundreds of billions or trillions of dollars in unnecessary interest charges in paying off the national debt, as the government would not have to pay interest to finance its debt (sovereign nations such as the U.S. and England have the power to create credit and money; see this, this, this, and this).

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. F. Beard

    Who needs banks? The government can simply create, spend and tax its own fiat. Is a bank needed for that? No, it isn’t.

    Then what about the private sector? Does it need banks? Only if one thinks it is necessary for borrowers to steal purchasing power from non-borrowers via so-called “credit”. And what does that “credit” do but drive up prices and fuel the boom-bust cycle?

      1. F. Beard

        Well, I wasn’t banned. But I was annoying another commenter pretty badly and he did have a point so I dropped out.

  2. grandiosity

    Well it seems we are doing this precisely because the banks are insolvent. Our challenge is that we can’t seem to muster the will to separate the banksters from their bonuses, and we can’t figure out how to spend the money needed to get unemployment down.

    But today it looks as if Justice might have got a bit of courage. Looks like it is going to be an interesting year.

    1. Art Eclectic

      I get the same impression. We are doing this because we have no other choice. We can let the big banks go down, but in the process it takes down all the credit card processing and what happens when J6P can’t put his gas and groceries on the card? Half the economic activity in the country grinds to a halt without those payment networks.

      The banks have us by the literal cojones.

  3. ambrit

    Looks to this lowly troglydite as if ‘events’ are going to, sooner rather than later, force the issue and impose some sort of ‘bank holiday’ due to illiquidity rather than regulation. That would be worse than bad, it would be uncontrollable. Why do we think ‘they’ called these busts in days of yore “Panics.” There were really two big runs on Wall Street in 1929. The first was ‘handled’ by the bankers themselves. Not having taken the proper lessons from that episode, they went back to business as usual, and suffered the big Panic later in the year. That one didn’t turn out so well. If 2008 was our early ’29 Panic, I’m not sanguine about the next phase for us all. As an Architect running a big job I once worked on remarked after being informed of a particularly egregious mess up; “You can plan for almost everything, except stupidity.”

  4. Max424

    “A house divided against itself cannot stand.”

    Bullshit, Mr. Dead President. Check out our current situation:

    The house we now live in has been split open at its foundation. The wretched fiscal half of our house is broke and must practice brutal austerity, while the exalted monetary side of our house is rich and need only find innovative ways to parley its infinite treasure; so clearly, the chasm at the center of our house could not be more yawning; yet our house still stands.

    Why? Sacrifice, Abe. You didn’t calculate … sacrifice.

    If the broke many are willing to sacrifice for the rich few, so the rich few can place bets against broke many, with the broke many’s money; a divided house will stand, forever — or at least for a very long time.

  5. Tao Jonesing

    Sorry, GW, but this isn’t news and we didn’t need the Congressional Research Service to tell us about it.

    1. alex

      Yes it is news. People like Dean Baker have been speculating for some time that banks were borrowing from the Fed at an almost zero rate and then lending the money to the Treasury at a higher rate, but this CRS report (thanks Bernie!) confirms it. It’s one thing to suspect a particular type of corruption and quite another to have it confirmed. And even if it weren’t news, it would bear endless repeating.

      1. Tao Jonesing


        If this is news to you, you haven’t been paying attention.

        The “lending” in question is actually the purchasing of Treasuries. Treasury doesn’t officially borrow money, it sells bonds, a form of debt instrument. The bonds that it has been selling have higher yields than than the interest rates the Fed has been charging– DUH, WINNING– and when you add in the interest the Fed has been paying on bank reserves to keep money velocity constant, the deal is even better.

        Dean Baker wasn’t speculating, he was pointing out the obvious. Everything that we’ve seen since Lehman’s collapse (who was my investment bank at the time) has been designed to recapitalize the insolvent banks. The coming finanical crisis is designed to do the same thing.

    2. Tom Crowl

      While the fact that banks, the Fed and large portions of the political elite of both parties have been engaging in what amounts to control fraud with the naive citizenry as the mark may not be news… since its been going on for decades in various forms…

      but GW is a big part of waking up those asleep…

      And he lays it out well here with support by what is certainly news to many re the Congressional Research Service view.

      Believe me… its frustrating to me as well that ‘authoritative’ reassurance should be needed for the average citizen to see what should be obvious (i.e. that the Fed/banks/govt love fest is bogus)…

      But its part of expanding a meme that needs to grow…

      I suppose people will see the specifics differently… but there’s a consensus building that there’s some problems in our economic paradigms.

      And that’s a huge understatement… cause if we’re not careful we’re going to lose our rights first and later the whole planet.

      And GW is helping to wake people up.

      P.S. Like a broken record:

      ICT (Information and Communication Technology) is and always has been a proxy for human transactions which originated within a social ‘world’ which allowed those transactions to take place in a direct peer-to-peer and unburdened manner.

      In a scaled society enablement of an unburdened micro-transaction and its networking is essential in politics, journalism and other ‘decision related’ areas.

      The method and model for that has broader utility but is essential in those areas at least.

      Technologies unburdening or lessening transaction costs become ubiquitous. (e.g. writing, the printing press, telephone, Google, Facebook).

      I believe this has that potential.

      And that the resulting network especially if owned and governed by its users could ultimately form a needed structure for a more balanced landscape for human development.

      (Don’t know if even I could follow what I just wrote but I’m convinced there’s a pony under this damn tree…)

      Leveling The Transaction Landscape: Technology and the Campfire

      P.S. Dear Mr. Stumpf,

      How’re things with you? It’s tough over here but certainly never dull. But I got a load of lemons and was wondering if you wanted to help me make some lemonade?

      1. Tao Jonesing

        @Tom Crowl,

        I’m no GW hater. I typically respond positively to his (?) posts, which often provide real news, or at least connect the dots in unexpected ways. Part of the reason I appreciate GW’s posts is his ability to appeal across the political spectrum without pandering to any ideology (often the same posts are here at NC, on zerohedge, and on Alex Jones’ prisonplanet).

        I’m just not a fan of trumpeting what has been apparent for years as “news.” It smacks of manipulation to me, but that’s my own bias.

  6. Allen C

    The fallacy of monetization or shadow monetization (banks creating credit to purchase govi bonds) ultimately leads to inflation and potentially hyperinflation.

    I concur that if pure govi emission of money is more cost effective than this Basel charade (i.e. no capital reqs for AA or above govi paper). The reality is that over time, real money representing real savings, backing all of this fiat becomes less and less. At some point, participants realize that there is little, actual value backing all of these promises.

    Exactly who, with real savings, is investing in UK Gilts at negative 4%? Inflation continues to rise unless adequate productivity is created to counteract the real and shadow fiat emission.

    This fiat emission is effectively a tax regardless of who receives the benefit. I would certainly prefer that the intermediaries receive nothing for their efforts at producing nothing except assisting the government in taxing (dare I state robbing) productive society.

  7. Paul Tioxon

    In times of economic crisis, the Federal Government has intervened with the necessary resources to resolve the problem at hand. During WWII, a strike by bus drivers in Philadelphia was thwarted by US Army GIs, brought in to break the strike and keep the Arsenal of Democracy running on all shifts. Before the auto took over the world, Philadelphia, NYC and other densely populated industrialized urban centers moved millions on a daily basis by bus, train and trolley to factories. Transit strikes stopped production across nearly all industries in one fell swoop. Similarly, the steel industry during the cold war was on strike when Pres Truman intervened by nationalizing the entire steel industry and threaten to have the US Army run it in order to bring production back. The corporations sued to regain control and won a decision in the US Supreme Court.

    Today, the US makes money, and little else. So, it should come as no surprise that the backbone of the financialized American Economy receives the commensurate support from the Federal Government that heavy industry did in its heyday. The Fed comes forward by any means necessary to rebuild the balance sheets of the annihilated Wall St banks, so can continue to function as the Global Engines of Capitalism.

  8. Demented Chimp

    Just more of the same. The more you dig the more unstable and corrupt our markets appear. Everything sensible you read tells you its all nonsense, yet right now its all that we have and all that we have known.

    On its own who cares but it does affect us all through this unsustainable need for permagrowth consumerism which is fucking the environment for more clothes toys and meat than we need. All so we can scratch that dopamine mastubatory high and stave off that feeling of dread that life has no meaning or purpose and is awfully finite.

    Personally i dont think there is a way out, just have to find a good place to weather the storm thats coming. We just arent ready culturally and biologically to act globally. Maybe the next generation will be.

  9. Valissa

    Obviously this is a major national security issue, and the banks are merely securing that the nation will continue to tithe to them (because they are doing God’s work). Here is some basic math that explains all, IMO.

    TBTF = Looting (aka pre-disaster capitalism)

    From Wikipedia
    Looting (Hindi lūṭ, akin to Sanskrit luṭhati, [he] steals; also Latin latro, latronis [Sp. ladrón], “thief”)—also referred to as sacking, plundering, despoiling, despoliation, and pillaging—is the indiscriminate taking of goods by force as part of a military or political victory, or during a catastrophe or riot, such as during war, natural disaster, or rioting.The term is also used in a broader sense, to describe egregious instances of theft and embezzlement, such as the “plundering” of private or public assets by corrupt or greedy authorities.

    1. Sufferin' Succotash

      “Loot” entered the English language by way of the British East India Company’s policies in Bengal in the 1760s and early 1770s. It was a case of a state-supported company systematically impoverishing the masses under cover of “law”, something that could never happen nowadays.

  10. Jackrabbit

    But there’s likely to be more to the story, isn’t there?

    The Fed’s QE2 was almost designed to spark inflationary fears that would send interest rates up. (And it did – at an historic rate). As such, QE2 would have acted to cause a dramatic widening in the spread that banks could make on their leveraged loans to the US government.

    Furthermore, if played right, the banks could’ve gotten capital gains from shorting the market just before QE2 started (when Bernanke was trumpeting QE2 as a force to stimulate the economy by LOWERING interest rates) and will see more capital gains as the yields fall due to QE2’s end.

    Was QE2 designed to help the economy or the banks? If the later, what does that say about Bernanke and the Fed?

    1. Tao Jonesing

      QE2 was designed to help the banks. Bernanke and the Fed are bankers who work for the other bankers.

      Any more questions?

      The Fed’s alleged “dual mandate” which was officially added by statute in 1978, I believe (unofficial since 1975) was abandoned in the early 1980s, when Paul Volker proved that targeting monetary and debt aggregates didn’t work, i.e., that Chicago School Monetarism was complete BS. The quantity theory of money epically failed in terms of managing the economy, but it persists to this day as conventional wisdom for dumb money, whose fleecing is the first line of defense for the banksters.

  11. Doug Terpstra

    On ownership of the more aptly-named Criminal Reserve Cartel:

    “J. W. McCallister, an oil industry insider with House of Saud connections, wrote in The Grim Reaper that information he acquired from Saudi bankers cited 80% ownership of the New York Federal Reserve Bank- by far the most powerful Fed branch- by just eight families, four of which reside in the US. They are the Goldman Sachs, Rockefellers, Lehmans and Kuhn Loebs of New York; the Rothschilds of Paris and London; the Warburgs of Hamburg; the Lazards of Paris; and the Israel Moses Seifs of Rome.”

    “Give me control of a nation’s money and I care not who makes it’s laws”
    -Mayer Amschel Bauer Rothschild

    He might better have said that he buys the whores that mke the laws, but that would insult prostitutes. Is it any wonder that AIPAC controls the US government?

  12. Mahmoud Darwish

    Palestinians are also “Semites,” but the word anti-semitism is never applied to prejudice against them, only to Jews.

    The use of “anti-semitism” has long been an opportunistic ploy of supporters of Israel to counter criticism of Israel, with mentions of the Holocaust and allegations of prejudice against Jews used to elicit sympathy for Israel, supposedly once again being threatened by menacing enemies.

    As Alexander Cockburn writing at Counterpunch once noted, “there’s a quick way of figuring just how badly Israel is behaving. There’s a brisk uptick in the number of articles by Jews accusing the left of anti-semitism.”

      1. Mahmoud Darwish

        @Andy Lewis

        “A reproach can only hurt if it hits the mark. Whoever knows that he does not deserve a reproach can treat it with contempt.” – Arthur Schopenhauer

      2. Mahmoud Darwish

        Andy Lewis said: “Hey Mahmoud….This approach DID hit the mark, and you g*dd*mn well know it. To pretend you “know” otherwise is just another blatant lie.”

        Mahmoud? Mahmoud? Oh yeah, that’s me. I had to re-read that one about four times before I remembered it’s supposed to be me. Ha ha ha. Did you really think a Palestinian would be posting comments on a USA-based econ blog? And fluent in English too? What are the odds? Chill out, dude, take a deep breath. My real name is Goldstein, and I’m a SVP in Institutional Equity Sales for one of the I-banks, so relax.

    1. Mahmoud Darwish

      Apologies to GW for straying off topic, but….

      Considering that anti-semitism is such a sensitive issue, and to show that the comments above (excerpted from Ed Herman’s article) were not directed against the Jewish people, but rather Israeli foreign policy, here is a poem written by the palestinian Mahmoud Darwish, addressing an Israeli soldier, and the soldier’s response. (Darwish, who died in Aug. 2008, is considered by many to be the Palestinian’s Poet Laureate)

      The poem is entitled “A Soldier Dreams of white lilies”

      I asked him:
      Can we meet man to man?
      He answered:
      In a city far from here.
      & when I’d filled his glass the fourth time
      I said joking:
      So you’re leaving… what about the homeland?
      He said:
      Leave me alone…
      I am dreaming of white lilies
      of a song-filled street
      a house that’s well-lit.
      I want a good heart
      not the weight of a gun’s magazine.
      I want a day & its sunlight
      & no fascist victory exultation in it.
      I want a smiling child in this day
      not an issue of the war-machine.
      I came here because I thought a sun
      was approaching its zenith not setting.
      I refuse to die
      turning my gun my love
      on women & children
      to guard the orchards & wells
      of oil tycoons & tycoons of weapons factories.

      1. Eleanor

        A wonderful poem. I have to track down more of his poetry. I’ve been hearing about it for years.

  13. Jim A

    It’s difficult to go from standard emergency room practice to mass casualty triage. The last time we had a large number of insolvent financial institutions was the S&L crisis a generation ago. So for the last ~25 years “throw some liquidity on ’em and arrange a merger” has been a workable solution for problem instutions. But now we have an ammount of bad debt coursing through the economy far greater than can be dealt with through such means. I’m reminded of the moment in the Battlestar Galactaca reboot where Adama says “We’re at war” and the president tells him “No, we’ve lost.” Despite the panic in 08, we haven’t really had that lightbulb moment.

  14. Man Long

    Please, if you really believe this, then get long leveraged spread players like mortgage REITs and banks and SHUT UP.

    Put your money where your mouth is

  15. agent zero

    This article brings up several issues.

    1. How big of issue is this? How much money are the big banks borrowing from the Federal Reserve and then turning around and using this money to buy Treasuries? All this data is available. I looked at this data 1.5 years ago and concluded it was not that big of issue. (If I recall correctly it was something like an average of 30 billion over a one year interval, with a 2% spread that is 600 million over one year, which is not that big of deal spread over all the big banks.)

    2. Why would the big banks borrow from the Federal Reserve when it is widely reported that the big banks have excess reserves with the Federal Reserve in which the Federal Reserve is paying interest to the big banks? Indeed it was speculated this week in a WSJ editorial that actually the opposite is occurring, the Federal Reserve is using the big banks’ excess reserves to buy Treasuries. Thus it is actually the Federal Reserve that is benefiting from the spread on the nominal interest rate on short term money versus the longer term rates, as was noted in the editorial.

    3. Why are the US bank stress tests considered a “complete and utter sham”. I have seen data that shows the opposite, the first round of stress testing done 2 years ago actually was a little conservative, the bank actual losses were less than predicted under the stress test.

    The Federal Reserve just recently let some banks increase their dividends based on the latest round of stress testing. Was this latest round of stress testing also a sham?

    Based on the data, I think the US stress tests proved to be entirely reasonable. However this has proven to be the opposite with the European banks where the European bank stress test were widely seen as too lenient 2 years ago and the data, especially with the Irish banks, has proved this.

    4. Why is the Federal Reserve always accused of accepting junk as collateral yet the Federal Reserve has never really lost anything, aggregately, on its loans. Indeed the recent flap about selling the Maiden Lane II and III portfolios shows that the collateral AIG posted was evaluated conservatively. The Federal Reserve will make money on these portfolios yet 2 years ago a lot of people were saying the collateral was junk and the Federal Reserve will lose money on it.

  16. Susan Truxes

    If the big banks are insolvent, is the Federal Reserve System also therefore insolvent? How much would it cost us to nationalize the Federal Reserve System. Wouldn’t it be good to see the value of the bank’s shares plummet to say, zero, and then nationalize them? Is this why the Fed has pumped so much money into the stock market?

  17. Jim Haygood

    Upset by banks using the upward-sloped yield curve to subsidize themselves? Prior to the Fed’s creation in 1913, the yield curve was not predominantly upward-sloped as it has been since. Under the gold standard, since there is no expectation of future inflation, long rates on average are not systematically different than short rates.

    If you want to be a fiateer, extolling the merits of ‘monetary sovereignty’ and such, then you’ve got to accept the consequences: a tilted yield curve and banks exploiting it. Yet some of us still pose as being shocked — SHOCKED! — that Ponzi schemes attract Ponzi profiteers. Who would have thought?

    1. F. Beard

      If you want to be a fiateer, extolling the merits of ‘monetary sovereignty’ and such, then you’ve got to accept the consequences: a tilted yield curve and banks exploiting it. Jim Haygood

      Not necessarily. Fiat should only be legal tender for government debts – taxes and fees – not private ones. If that were case, then government overspending wrt taxation would only hurt the government and its payees, not the private sector. Thus government would have a very strong incentive to spend wisely. Thus fiat would likely maintain its purchasing power.

    2. Rodger Malcolm Mitchell

      It’s humorous how often “Ponzi scheme” is used to describe federal deficit spending, by people who have no idea what a Ponzi scheme is.

      In a Ponzi scheme, early investors are paid returns using later investors’ money. A Monetarily Sovereign nation doesn’t work that way. Instead, it does not use any sort of income — neither borrowing nor taxing — to pay its bills. It simply credits bank accounts.

      If taxes and borrowing fell to $0 or rose to $100 trillion, neither event would affect, by even one dollar, the federal government’s ability to pay its bills.

      Not understanding the difference between Monetary Sovereignty and monetary non-sovereignty is the single biggest economic problem facing America today.

      Rodger Malcolm Mitchell

  18. Foundation

    Sometimes it’s hard to believe this ponzi kept going for as long as it did. It should have popped last time but a round of unprecedented stimulus forced a last gasp of air into the bubble. All they did was kick the can down the road and now the collapse will be even worse. Posters on have been predicting this outcome for some time, and now the scale of this coming collapse will surprise the majority of commentators, in the same way the GFC surprised most economists. Of course, there will be revisionists who will claim they predicted it all along but the truth is the majority of economists are blind optimists who couldn’t see a coming train before it plows into them!

    Australia Auction Clearance Rates Forum

  19. Andre

    Who needs the big banks? The US government needs the big banks, and desperately! With all the financial and economic problems that the country is facing, who will continue to finance the government’s deficit and debt? China? Japan? Europe? LoL. So… what is left is for the Fed to finance the Treasury, via

  20. Rodger Malcolm Mitchell

    This may irritate our sense of fairness, but when a bank (or anyone) borrows from the government at low rates and lends back at higher rates, this adds money to the economy, which is stimulative, and benefits us all.

    The only thing more stimulative would be if the government simply gave the money, not lent it.

    Rodger Malcolm Mitchell

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